Electra's tender offer to shareholders meant shareholders sold shares to brokers Casenove rather than direct to Electra. This could have given a tax advantage to individual taxpayers in the 40 per cent band, but would not have affected institutional shareholders and basic rate taxpayers.

This structure would have been permitted under section 703 of the Tax Act as long as there was no improper motive. Charles Hellier, tax partner at Linklaters, says the motive behind the structure was to defend against 3i's hostile bid by providing cash in the quickest and simplest way possible.

He adds that gaining a tax advantage was irrelevant to 85 per cent of Electra's shareholders, which were institutions.

“Under 703 we asked the Revenue to agree that this wasn't being done for a bad motive, but they wrote back saying they weren't satisfied with the information available to them. Those people who were better off this way could get a letter from the Revenue asking for more tax,” says Hellier.

“The implication for buybacks is that since the abolition of advanced corporation tax it is easier for companies to pass cash back to shareholders, but the Revenue may be more difficult in its approach to section 703.”

The defence was successful after a knife-edge vote on 15 April by Electra's shareholders. Corporate partner Steven Turnbull led the eight-strong Linklaters team, which was split between those working on the defence and those structuring the tender offer.

Turnbull says he had been working with Electra on restructuring options for several months before the bid by 3i, “so we were alive to the issues that arose out of the offer and the defence”.

He says the structure was unusual because Electra issued its defence before the offer was made by 3i, following the breakdown of friendly discussions in January. “We didn't have a real offer and therefore we were structuring our defence without the benefit of the offer being on the table,” he explains.